Malte Von Anrep v. Minister of National Revenue, [1979] CTC 2644, 79 DTC 563

The Chairman:—This is the appeal of Mr Malte Von Anrep from an income tax assessment by which the respondent added to the appellant’s 1972 income, the sum of $65,315 as his share of profits realized on the sale of property (hereinafter referred to as “Kim Carol Farms”) on the ground that the profit was on revenue account. The respondent also disallowed an amount of $1,000 claimed by the appellant in 1972 as a capital loss.

Summary of Facts

The appellant is a lawyer practising his profession in partnership with a former class-mate, Mr Eugene Chorozy, in St Catharines. It is alleged that both the appellant and Mr Chorozy acquired Kim Carol Farms which was largely made up of vineyards for the purpose of earning income after retirement from their professions.

The property, comprising 250 acres, was acquired in two stages, from two different vendors—the first section being acquired by Mr Chorozy and the second being acquired by Mr Chorozy and the appellant in 1969. Notwithstanding contracts of purchase and sale included in Tab 3 of Exhibit A-1, it was admitted that at the time the property was sold both the appellant and Mr Chorozy were the owners of Kim Carol Farms in equal partnership and that the total purchase price was $255,000. The farm was operated for the production of grapes as a single unit until early 1972, at which time it was sold for $425,000 to Donald, Gary and Peter Bergman (Exhibit A-1, Tab 3). The appellant’s share of the profit on the sale of the farm being $65,313.50, there is no dispute as to the quantum of the amounts involved in the transaction, the sole issue being whether the profit realized by the appellant was on income or on capital account.

In reviewing the appellant’s course of conduct prior to and subsequent to the sale of the subject property, the evidence is that the appellant and Mr Chorozy had, also for the alleged purpose of providing a retirement income for themselves, acquired on a 50/50 basis, an apartment building in January, 1968 at 32 Welland Avenue in St Catharines. Very shortly thereafter the appellant, contemplating marriage, arranged to trade his share in the apartment building for a residence and Mr Chorozy agreed to sell the apartment building. The Minister assessed the appellant’s profit on the disposition of the apartment building in 1968 as income but after the appellant filed a notice of objection, the profit was accepted by the Minister as being a capital gain (Exhibit A-1, Tab 1).

Also in 1968, the appellant acquired with Mr Chorozy and a dentist, whose name I believe to be McNabb, interest in a large tract of land on Geneva Street allegedly for the purpose of constructing a combination of a medical, commercial and residential building. Although the zoning was agriculture, there was a highrise building on the adjoining property and it was felt that it would be possible to have a by-law permitting the proposed construction on the Geneva Street property. As a result of a falling out with Dr McNabb, the appellant and Mr Chorozy attempted to continue the project with investors from Toronto—the appellant and Mr Chorozy holding a 50% interest and the investors, 50%. Although the zoning was changed to permit the realization of the project, the construction never commenced and the property was sold, allegedly in frustration, but with no supporting evidence. The appellant realized a small gain on the disposal of the property which he reported as a capital gain. The Minister did not challenge the appellant’s tax returns for 1973 (Exhibit A-1, Tab 2).

After having given his evidence, the appellant’s counsel asked that the appellant be allowed to return to the stand to inform the Board of his acquisition in 1974 of a one-third interest in 2000 MG Investments in Chippewa which, as I understand it, owned land in Niagara Falls for development purposes. Subsequently, 2000 MG Investments purchased a building which had been used as a union hall. The land owned by 2000 MG Investments in Niagara Falls was traded as part of the purchase price of the building. The building was sold in 1975. The mortgage granted on the sale of the building was guaranteed by a Robert Jane who having declared bankruptcy after legal action had been taken against him for payment, the appellant realized no profit on his share of the disposition of the building.

Other than the subject property, the above were the only real estate transactions in which the appellant was involved. The evidence is, however, that the appellant’s law partner, Mr Chorozy, did have considerable dealings in real estate as early as 1965, at which time he was president and beneficial shareholder of a company known, I believe, as Choreba Holdings, which had acquired a narrow strip of land at 366 Thorold Road in Welland of 1!2 acres on which townhouses had been allegedly planned but which did not materialize, and the land was sold. In 1969, a duplex at 266 Glendale Avenue was purchased by Mr Chorozy and sold shortly afterwards. In 1970, 92 acres of land was purchased in Niagara Falls for the development of a mobile home park but the school board objected to such a development and the land was sold as raw land in 1975. In 1970, 2000 MG Investments was incorporated by Mr Chorozy who purchased land in Chippewa which was sold in 1974. In 1973, 4000 JA Investments Ltd was formed by Mr Chorozy to deal in real estate. On the basis of the evidence adduced and Mr Chorozy’s own admission, he had, to a lesser degree prior to the acquisition of the subject property and to a greater degree after that purchase, been engaged in a series of real estate transactions. I have no difficulty in concluding that Mr Chorozy was at the time of the purchase of the Kim Carol Farms, very knowledgeable and quite active in real estate transactions.

Subject Property

On March 24, 1969, Mr Chorozy, in trust, acquired a 150 acre grape farm from Mr Van Helvert for a price of $165,000. The appellant was approached by Mr Chorozy to participate in the purchase. Although the appellant was reluctant at first to do so, he did in fact purchase with Mr Chorozy a second grape farm from Mr Yaworski for $85,000 (Exhibit A-1, Tab 3). Although the documents do not reflect this, it was admitted that the appellant jointly owned both farms with Mr Chorozy.

The appellant, rather than Mr Chorozy, looked after the operation of the grape farm with the help of a manager. In order to avoid the problems of hiring seasonal help for the harvesting of the grapes, Kim Carol Farms purchased a grape harvester for some $20,000, which allegedly was the first to be introduced in Ontario. Notwithstanding its mechanization, the farm showed losses of $18,740.71 for 1969; $17,849.00 for 1970; and $11,917.55 for 1971. For the 1972 taxation year, however, a profit of $20,992 was realized on the farm operations. It was noted that the farm’s fiscal year ran from November 1 to October 31, and that the cash method of accounting was used. The appellant alleged that the financial statement for 1972 showed the income from the sale of grapes in the autumn of 1972 but that only one-quarter of the yearly expenses for 1972 had been incurred and recorded. The appellant stated that when all the 1972 expenses would have been recorded the farm operations would again have shown a loss in 1972. There is no evidence to support that statement.

The income from the sale of grapes was allegedly generally lower than what might have normally been expected and serious suspicions that the manager was less than honest in his administration of the farm caused considerable worry and frustration to the owners.

Mr John Biondi, a real estate broker in St Catharines, testified that in January of 1972 he had approached Mr Chorozy on behalf of a client who wished to purchase the Kim Carol Farms for $425,000. The offer was accepted and the sale was executed in April of 1972 (Exhibit A-1, Tab 3).

Findings of Facts

Counsel for the appellant filed a memorandum dealing with secondary intention and supported his contention by referring to a list of court and Board decisions on the subject. There is, of course, no difficulty in accepting the principles the courts have evolved over the years on the subject of secondary intentions. The problem in all these appeals lies in the appreciation and interpretation of all the facts that surround the purchase and sale of a given property and it is only on that basis that the issue can be determined.

On the basis of the evidence adduced, I find that the appellant’s declared intention of acquiring the farm and operating it as a source of retirement income as indeed credible and reasonable. The issue in this appeal, however, is not so much what the appellant’s primary intention may have been but whether he had, at the time of acquisition of the farm, an alternative or secondary intention of disposing of it under certain circumstances which also constituted a motivating consideration for its purchase.

Although the appellant’s declared intention, given under oath, can be accepted as being credible and reasonable, it cannot in itself justify allowing the appeal unless the appellant’s conduct prior to and subsequent to the acquisition is entirely consistent with his declared intention and that pertinent facts surrounding the transaction do not also indicate the possible existence of an alternative intention at the time of acquisition.

The fact that the appellant may have been interested in creating a retirement income for himself is supported by his taking out insurance which included a retirement savings plan (Exhibit A-1, Tab 4). The deregistration of the retirement plan to cut down the cost of the insurance premiums, however, has, in my view, no probative value whatever in determining whether or not the appellant had at the time of purchase a secondary intention of selling the property.

The work which the appellant contributed to the farm, the purchase of a grape harvester and the repairs and maintenance effected on the property is evidence which tends to support the appellant’s declared intention of operating the farm as a source of retirement income. It should be noted, however, that these activities are not altogether inconsistent with an alternative intention of transforming the farm into a modern sizeable operation for purposes of resale.

In these circumstances, the documentary and the oral evidence establishing all the facts surrounding the transaction is of paramount importance in determining whether or not the appellant had, at the time of acquisition, an alternative intention of reselling the property.

The facts which I believe to be very pertinent to the issue can be summarized as follows:

1. The appellant’s close association with Mr Chorozy, a law partner and a well-known real estate trader who was very knowledgeable of the values of the properties in the area.

2. The purchase by the appellant and Mr Chorozy of an apartment building at 32 Welland Avenue in 1968 which was sold in the same year. The rather unconvincing reasons given by the appellant for selling the apartment building, viz, to effect a trade of the appellant’s interest in the building to buy a matrimonial home.

3. The purchase by the appellant and Mr Chorozy of land on Geneva Street in the same year, at a time when the appellant alleges he had not enough funds to make a downpayment on a matrimonial home. The sale of the land with little or no effort having been made to realize the project for which it was allegedly purchased.

4. The purchase by the appellant and Mr Chorozy of the two grape farms in 1969, neither of whom had any experience in grape farming. The unusual method of financing what was to have been an investment to generate retirement income. The balance sheet as of October 31, 1970, shows the existence of 4 mortgages on the property whose interest rates ranged from 7% to 18% and represented annual interest payments of $18,251 (Exhibit A-1, Tab 3).

5. Having been advised by neighbouring grape farmers that the income from the Kim Carol Farms vineyards was abnormally low and suspecting that the farm’s manager was selling part of the farm’s produce on his own acount, the appellant took no action to find another manager, to stop his loss of income, or to recover his losses.

6. Mr Biondi, a areal estate agent, approached Mr Chorozy, who took no part in the operation of the farm, with an offer to purchase the farm for $425,000 and concluded the sale with Mr Chorozy.

7. Notwithstanding the unusually high annual interest payments resulting from the appellant’s small investment in the project, and the loss of income known to have been a consequence of poor management, the appellant’s testimony is that because the farm was continuously showing losses, he readily agreed to sell and was relieved when the farm was sold. The farm was operated by the appellant for a little over two years.

In cases such as this considerable attention is paid to ascertain whether In cases such as this considerable attention is paid to ascertain whether or not the taxpayer’s course of conduct is that of a trader. In these circumstances one might well ask whether the appellant’s course of conduct is consistent with that of a person who had no intention, at the time of acquisition, other than investing in farm property as a source of retirement income. Circumstantial though the evidence may be, I am satisfied that at the time of purchase and as a motivating factor in the purchase of the farm, both the appellant and Mr Chorozy had, other than their declared intention, the intention of selling the property at the first opportune time.

Decision

I hold, therefore, that the amount of $65,315 realized by the appellant on the sale of the Kim Carol Farms is income from a business or an adventure in the nature of trade. The appeal is dismissed.

Appeal dismissed.